For military families, one of the most challenging parts about paying taxes is accurately estimating your withholding each year. Withholding is the amount of taxes that are taken out of each paycheck. Those payments are applied against your total calculated tax liability, and the different is your taxes owed (if you did not have enough withheld) or your refund (if you had too much withheld.) Ideally, a taxpayer will have a very small amount owing or refunded, meaning that they have estimated their tax liability accurately and filled out their W-4 withholding form accurately.
Unfortunately, this is not as easy as it sounds. Your total tax liability depends on a lot of different factors, including your actual income, any self-employment income, rental properties, number of children, and a list of other various credits and adjustments. With the challenges of the military lifestyle come all sorts of changes that can affect your tax situation. Deployment to a combat zone brings non-taxable income. Military spouses tend to start and stop jobs more often than civilian spouses, making total income hard to estimate.
Each year, when I complete my previous year’s tax return, I try to estimate the next year’s taxes and make sure that we are withholding correctly. It isn’t easy, that is for sure. The IRS has a withholding calculator that helps, but it even close to completely accurate. I can’t figure out why, but the IRS estimates for our family are only about half what I estimate.
Proper estimating is the only way to be sure that you won’t be surprised when you do your tax return next year. Take a few minutes, looking at last year’s taxes, estimate any changed, and see what your 2010 tax bill might be. Then check your withholding to ensure that you are having the right amount taken out each pay period. You will be glad that you did!